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Wealth Inequality – Is There A Way Out??

While media continues celebrate wealth and growing number of millionaires, the income disparity across the world is getting worse. As per the Oxfam report released earlier this week, an astonishing 82% of total wealth created last year was cornered by the top 1% while the bottom half saw no increase at all. The increase, over $760 bn, was seven times what is needed to bring about 15% of the world’s population out of poverty. Here is a look at some more details from the report.Inequality is a global phenomenon getting perpetuated as extreme wealth continues to grow. Year 2018 saw the biggest increase in number of billionaires numbering just about 2,000 cumulatively holding about $7 trillion of wealth. The richest 1% now owns more wealth than the whole of the rest of humanity! The disparity is not restricted to low income countries. It is worst in the US with the three richest people owning the same wealth as the bottom half of the country’s population. The country is among the worst in terms of inequality with the top 1% owning almost 40% of the stock market.

The inequality can be termed into two forms – inequality of income and income of wealth. Wealth inequality is much higher, further worsening the income inequality as the wealthy ones receive much higher share of income through dividends, capital gains etc. As per World Inequality Report 2018, the top 1% received 27% of total additional income between 1980 and 2016, whereas the bottom 50% secured only 12%. This income inequality further perpetuates wealth inequality as the income received by lower income groups is barely enough to meet basic meets. In the US, the wealth share of the top 0.1% grew from 7% to 22% between 1978 and 2012.

Despite all the assertions that it is deserved and hard-earned income, the report states that over two-thirds of the wealth has been amassed through sources that does not reflect productive activities, but what economists call ‘rent’. These are Monopolies, Cronyism and Inheritance. For instance, Carlos Slim the sixth richest man in the world with wealth of $54 bn derived his fortune from an almost complete monopoly over fixed line, mobile and broadband communications services in Mexico. This goes together with cronyism, the ability of powerful private interests to manipulate public policy, the two feeding on each other. Similarly, a third of the world’s extreme wealth is held by heirs. Over the next 20 years, 500 of these richest people will hand over $2.4 trillion to their heirs.

Yet another example of monopoly squeezing the income share of marginalized is the global cocoa value chain. Only eight traders and grinders now control around 75% of the global trade in cocoa and less than 6% of the value of a chocolate bar reaches cocoa farmers. This is a sharp decline from the 1980s when farmers received more than double this value.

Another method of amassing wealth is by tax dodging. The super rich are estimated to be hiding at least $7.6 trillion from the tax authorities, more than what the top 2,000 officially own! Top 0.01% is avoiding as much as 30% of the tax they owe. The menace is equal bad in developing countries which lose at least $100 bn a year, almost Rs 7 lakh crore, to corporate tax avoidance.

An important reason for income disparity is increasing pressure to enhance shareholders’ returns and CEO’s pay getting linked to profits. This is compelling companies to squeeze wages and evade taxes. For instance, it would cost $2.2 bn a year to increase the wages of all 25 lakh garment workers in Vietnam from the current wage to a living wage. This is the equal to just one-third of the amount paid out to shareholders by the top five companies in the sector in the country. Globally, $1.2 trillion was extracted by shareholders in the form of dividends in 2015.

Similarly, only 1% of a Fortune 500 CEO’s pay consisted of share options in the US in 1970s; in 2012, stock options accounted for 80% of their compensation. A survey across US, South Africa, India and Spain showed that while people thought CEOs are paid 30 times the ordinary workers’ pay, in reality, it is actually over 300 times! In India, CEO’s pay is 483 times the pay of ordinary workers! The inequality has also been accentuated by government policies. For instance, average statutory corporate tax rate across G20 countries was 40% in 1990s. This came down to about 29% in 2015.

However, there is rising awareness and pockets of excellence too. For instance, Cafe Direct, a UK based company, shares 50% of its profits with coffee farmers. Other examples cited are Divine Chocolate, a fair-trade business partly owned and governed by farmers’ groups, John Lewis, owned by employees and Amul, owned and controlled entirely for the benefit of millions of farmers.

While the menace seems to be deep rooted, the reasons mentioned above give idea of the measures needed to reduce the gap. It suggest measures like promoting a pay ratio for companies’ top executives that is no more than 20 times their median employees’ pay, changing taxes rates that are disproportionately paid by the very rich, such as wealth, property, inheritance and capital gains taxes. Governments should aim for the collective income of the top 10% to be no more than the income of the bottom 40%. It mandated all multinational corporations to conduct due diligence on their full supply chains to ensure that all workers are paid a living wage.